Top Markets 1Q 15: 1Q 14s Losers Are 1Q 15s Winners!
April 8, 2015
Emerging markets, which ended 2014 at both spectrums of the performance table, continued to its diverse range of returns into 1Q 2015. In this end-of-quarter update, we take a closer look at the top-performing markets over the past 3 months, (Russia, Japan and China), while the performance of the bottom performing markets of Singapore, Malaysia and Brazil are reviewed.
Author : iFAST Research Team
Top Markets - 1Q- 15
Table 1 - Market Performance (in SGD terms)
1Q 15 Return
MSCI Asia ex-Japan
MSCI Emerging Markets
MSCI AC World
S&P / ASX 200
Source: Bloomberg, iFAST Compilations
Returns in SGD terms excluding dividends, as of end March 2015
2015 started with the majority of the investment community remaining optimistic on the prospects for developed markets, buoyed by both the expectation and subsequent announcement of an expanded asset purchase programme in Europe. Emerging markets, which ended 2014 at both spectrums of the performance table, continued to its diverse range of returns into 1Q 2015. While the Russian equity market was at the bottom of the performance table in 2014, in 1Q 2015, Russian equities rose 15.7% in SGD terms to end the quarter as the best performing market under our coverage as easing geopolitical tensions and stabilising crude oil prices (Brent ended the quarter down a mere -3.9% following a horrendous -49.0% plunge in 2H 2014) lent support. Amongst the other top performing markets were the Japanese and Chinese equity markets, with the Nikkei 225 and HSML 100 delivering returns of 13.9% and 10.9% respectively.
European and US equity markets delivered returns of 6.6% and 4.1% returns respectively. European equities were buoyed by improving economic data, an expanded asset purchase programme and rising optimism and investor sentiment. Although European equities rose 16.0% in EUR terms, the continued depreciation of the Euro against the SGD detracted from returns for local investors. The US equity market has continued to trudge higher for the quarter despite soft economic data releases and uncertainty regarding the timing of what is expected to be a mild hike in rates by the US Federal Reserve.
Other Asian equity markets were broadly supported in 1Q 2015 by the easing monetary policy of several central banks as the current benign inflationary environment has allowed many Asian central banks to cut interest rates and ease monetary policy in order to fulfil their respective objectives and mandates. The Monetary Authority of Singapore surprised markets by seeking a slower pace of appreciation of the SGD (change in the slope of the band) in an unscheduled change in policy on 28 January 2015 (its first since the September 11 attacks in the US back in 2001), while the Reserve Bank of India, the Bank of Korea, Bank of Thailand and the PBOC have all adopted easing biases as they seek to revive strong economic growth amidst a disinflationary trends in prices.
The sole market under our coverage to have posted negative returns in 1Q 2015 is the Brazil equity market, posting losses of -12.1% on the back of the corruption scandal afflicting index heavy weight Petrobras that has implicated several politicians, as well as a depreciating Brazilian Real which contributed the bulk of the losses for local investors as it lost –14.4% against the SGD in 1Q 2015.
In this end-of-quarter update, we take a closer look at the top-performing markets over the past 3 months, (Russia, Japan and China), while the performance of the bottom performing markets of Singapore, Malaysia and Brazil are reviewed.
[All returns in SGD terms unless otherwise stated as of 31 March 2015]
Top Performing Markets
Russia (+15.7% in 1Q 2015 in SGD terms)
After a -27.1% loss in 4Q 14, the Russian equity market, represented by the RTSI$ index, rebounded in 1Q 2015 (from a -42.8% loss in 2014), posting a 15.7% gain to be the top performer in 1Q 15. While the Russian currency, the RUB, has suffered in the previous quarter, the RUB has since stabilised, remaining unchanged against the USD and strengthening 4.1% against the SGD throughout 1Q 2015. Top performers this quarter are companies like Sistema and Mobile Telesystems, with their share prices increasing by 57% and 46% respectively. Energy companies like Bashneft and Surgutneftegas saw their share prices rally more than 50% over the quarter, while property developer LSR Group’s share price surged 45% over the same period.
The Central Bank of Russia (CBR) continued to ease monetary policy, lowering the country’s benchmark interest rate twice by 300 basis points to 14.00% by the end of the quarter. The move by policy-makers suggests a priority to stimulate economic growth, where previously they prioritised stabilising the RUB and controlling inflation. The stabilisation of the RUB in 1Q 15, as mentioned earlier, could have influenced the central bank to cut interest rates to stimulate the economy affected by the decline in global energy prices last year. Industrial production data remains weak and forward-looking indicators like PMI readings remain in contractionary territory – suggesting that the economy would take more time before economic momentum starts to pick-up and accelerate again.
Estimated earnings of Russian companies on aggregate have begun stabilising over the quarter. While they are still lower year-to-date (earnings have decreased by -14.9%, -11.2% and -11.3% for 2015, 2016 and 2017 respectively), they begun stabilising from February, with 2015, 2016 and 2017’s estimated earnings revised upwards by 1.6%, 0.7% and 3.2% respectively month-to-date. Notably, estimated earnings for the heavily weighted energy sector have been increased over the course of March, with companies like Transneft and Surgutneftegas’s EPS revised 16.4% and 3.8% higher month-to-date. However, Russian financials and banks continue to see earnings downgrades as sell-side analysts adjust their forecasts to price in a weak macroeconomic environment, with banks like Sberbank seeing its EPS revised -13.4% lower month-to-date.
With the stabilisation of earnings estimates for Russian companies, the RTSI$ index currently trades at estimated PE ratios of 6.0X, 5.1X and 4.4X for 2015, 2016 and 2017 respectively as compared to its fair PE ratio of 7.0X. Even though the situation in Russia still remains weak, expected returns are now higher than before, and hence, we areupgrading Russia’s star ratings to 4.5 stars “Very Attractive”– the Russian equity market is a buying opportunity for aggressive, patient, and long-term investors willing to stomach and ride out near-term volatility.
Japan (+13.9% in 1Q 2015 in SGD terms)
Represented by the Nikkei 225 Index, the Japanese equities surpassed the 19000 mark in March 2015 for the first time since 19 April 2000. Markets have speculated that the Bank of Japan will expand its asset purchase programme due to the climbing risk of deflation. In the first quarter of 2015, Japanese equities rose 10.1% (in local currency terms), becoming the second-best performing market under our coverage.
Japan is officially out of recession, but the recovery pace rate is still far from strong. The economy expanded 0.6% quarter-on-quarter or an annualised rate of 2.2% in 4Q 2014 after contracting for the two consecutive quarters. GDP growth missed consensus’s forecast for an annualised 3.7% increase, and was supported by a rebound in exports, thanks to the JPY’s depreciation. The country’s core CPI (excluding food and last year’s sale tax hike) rose 0% year-on-year in February, the first time that inflation has hit zero since May 2013. The BOJ governor Haruhiko Kuroda admitted this month that the 2-year target of a 2% inflation rate will not be achieved. Nevertheless, the stock market hit 15-year highs, partly due to the climbing expectation on more easing to be offered by the central bank.
In February 2015, five of the seven largest automakers posted record operating profits in the April-December period. The Banking sector also did well in April to December 2014, with Mitsubishi UFJ Financial Group booking record profits of JPY 927 billion during the period. According to the data from SMBC Nikko Securities, the combined full-year earnings projections based on the financial statements released by 1,355 companies in the Tokyo Stock Exchange 1st Section (announced in their FY 15 3Q results) will hit a record JPY 26.5 trillion. We expect the earnings of automaker and electronics to continue to be strong in the coming financial year.
As of 31 March 2015, earnings of the Japanese equities are expected to increase by 14.6% in FY 2016 and 10.0% in FY 2017. Estimated earnings in FY 2016 of the consumer discretionary sector (dominated by auto manufacturers) and IT sector (dominated by electronics manufacturers) are expected to grow by 18.8% and 16.3% respectively. Estimated PE of Nikkei 225 Index is at 18.3X for FY 2016 and 16.6X for FY 2017, well below its fair PE of 19X. The estimated upside by end-2016 is 12.1% (annualised), representing strong upside potential, the highest amongst developed markets.
China (+10.9% in 1Q 15 in SGD terms)
Represented by the HSML100 Index, the H-shares market finally saw signs of picking up its A-share counterpart’s stellar performance since the PBOC first cut interest rates in November last year. As predicted, the PBOC had adopted more easing measures, interest rate cuts and reducing the Required Reserve Ratio (RRR) in 1Q 2015. Economic data in this quarter still suggests that China’s slowdown seems inevitable under the “new normal”.
Currently, China’s economy still heavily depends on the manufacturing sector. Because the government is trying to eliminate outdated and over-producing capacity across the industry, related SMEs (industrials, materials and manufacturing industries) are struggling under the economic transformation phase and showed no improvements being suggested in the latest PMI figures. We expect the Chinese government to adopt more targeted easing measures to aid the industry and remain optimistic on Chinese equities.
The HSML100 Index enjoyed a new round of earnings upgrade led by Chinese financials. The index is expected to grow earnings by 12.7% in 2016 (as of 30 March 2015), shortly after the end of the Chinese People's Political Consultative. During the meeting, Primer Li suggested to strengthen the use of internet finance platforms, which Chinese banks are trying to capitalise on. Moreover, the Chinese banks are now expanding their business to provide stock brokerage services in mainland China, therefore earnings forecasts have been increased amid this optimism. The sector is now expected to grow earnings by 15.7% in 2015. In addition, the proposed “internet plus concept” has also caused the rally of the Chinese tech related stocks, with the information technology sector expected to grow earnings by 29.8% in 2015.
Looking forward, we remain optimistic on the IT and financial sector in mainland China as the benefits of monetary policy easing for Chinese banks outweigh the drawbacks. Despite the decreasing interest margin, the banks have more liquidity from the loosening of RRR to develop other businesses and services. The internet financing and stock brokerage services shall be the new growth driver for the sector. We expect the industrials, materials and manufacturing industries to continue to struggle amid the economic transformation.
We believe the PBOC may adopt more aggressive monetary policy to support credit lending activities in order to maintain a desired economic growth momentum in 2015 which will likely result in better market sentiment in 1H 2015. We particularly favour HSML100 Index which has been trading at a significant discount relative to A-shares.
According to market consensus, as of 31 March 2015, the estimated PE for the HSML100 Index is at 10.13X and 8.99X for 2015 and 2016 respectively and are well below our fair PE of 13X. Based on the previous improving sentiment, we maintain the5.0 Star—“Very Attractive”—rating for the Chinese equity market.
Singapore (+2.4% in 1Q 15 in SGD terms)
Despite delivering gains of 2.4% in 1Q 2015, the Singapore equity market was amongst the bottom performers as its muted performance was outpaced by the other markets under our coverage. While real estate related counters (both REITs and developers) managed to do well, weakness was seen in the offshore marine sector, with the likes of Sembcorp Industries and Sembcorp Marine declining, and in the banking sector where DBS Group Holdings Ltd and United Overseas Bank dropped. Other sectors that did not do well include the commodity-related counters such as Olam, Golden-Agri Resources Ltd and Noble Group as commodity prices have continued to decline and as Noble Group has been hit with allegations of financial manipulation by Iceberg Research.
The 3 Month SIBOR, a common benchmark used to price loans such as housing mortgages, has continued its ascent, with its latest reading measuring 1.01034% (as of 27 March 2015). The 3 month SIBOR has now risen by over 60 basis points since its lows in 2H 2014, with 55.3 basis points of the rise having taken place in 2015. While the 3 Month SIBOR has indeed risen off its lows, it’s still below its 1999-2007 average level of 1.99%. With US monetary policy likely to normalise over the course of the next few years, the 3 Month SIBOR is more than likely to rise. The rise in the 3 Month SIBOR is likely to boost the earnings of banks through fatter net interest margins, given that most of Singapore’s mortgages are tied to floating rates, with the 3 Month SIBOR a regular benchmark used in the pricing of loans.
Earnings estimates for Singapore companies have been relatively resilient thus far in 2015, with earnings estimated to grow by 7.0%, 8.5% and 6.9% in 2015, 2016 and 2017 respectively. The Singapore equity market is currently trading at PE ratios of 14.3X and 13.0X as compared to its estimated fair PE of 16X, representing upside potential of over 23% by end 2016, with an estimated dividend yield of 3.4% and 3.6% in 2015 and 2016 respectively. We maintain our star rating of4.0 Stars – “Very Attractive”on the Singapore equity market.
Malaysia (+1.8% in 1Q 15 in SGD terms)
After incurring a loss of -7.2% (in SGD terms) last year, the Malaysian equity market (represented by the KLCI Index) remained sluggish over the quarter, delivering a low return of 1.8% 9 (in SGD terms) in 1Q 15.
The MYR continued to depreciate against the SGD, losing -2.04% in 2015. The MYR has depreciated more because of persistent weakness in international crude oil prices. With Malaysia being a net-oil exporter and oil related revenues contribute at least 25% of the nation’s coffers, investors are worried that the nation’s budget deficits might worsen with the weakness in oil prices. This made foreign investors unwind their holdings in Malaysia, increasing pressure on the weakened ringgit.
Investors remained suspicious of economic development in Malaysia and stayed on the side-lines of its equity market over the quarter. This is because of the financial position of 1Malaysia Development Berhad (1MDB), a strategic development company owned by the government. 1MDB’s large debt is still a source of uncertainty and a close contingent liability to the nation because of the company’s operations and leadership, as well as the RM5.8 billion explicit sovereign guarantees on the entity’s outstanding debt of RM42 billion.
Malaysian companies have finished their earnings reporting season for 4Q 2014 in 1Q 2015. Reported earnings for the energy and material sectors have suffered due to the slump of crude oil prices, with reported earnings significantly below consensus forecasts, similar to the majority of companies in Malaysia. Earnings estimates for the KLCI Index on aggregate have been downgraded by -2.8% since the beginning of the year, because of the downward earnings revisions of sectors such as Materials (-14.3%), Energy (-13.1%) and Consumer Staples (-6.5%).
Looking ahead, the Malaysian market is likely to face challenging times in the near term with persistent weakness of crude oil prices. But the Malaysian economy is expected to enjoy growth over the long term, driven by growth in non-oil exports (benefiting from a weakening currency in the near term) and government infrastructure projects. As of end-March 2015, the KLCI Index is trading at estimated PE ratios of 15.4X and 14.3X for 2016 and 2017 respectively, compared to its estimated fair PE of 16.0X. This shows an annualised expected return of 7.5% based on end-2017 earnings. Considering the resilient economic growth in the country in future, the star ratings for Malaysia remain at3.0 stars "Attractive".
Brazil (-12.1% in 1Q 15 in SGD terms)
Brazil was the lowest performer in 1Q 2015, incurring a -12.1% loss over the quarter, continuing its weak performance from the previous quarter (incurring an -11.3% loss in 4Q 14). However, Brazilian equities actually increased 2.3% (according to the Bovespa index), but the weak BRL against the SGD has detracted Singapore-based investors returns. Brazilian pulp and paper companies saw their respective share prices jump and beverage producer Ambev also saw its share price rally by more than 14%. Laggards over 1Q 2015 were mining titan, Vale, and telecommunications company, Oi, which saw their share prices plunged by -19.6% and more than -40.4% respectively. Oi investors remain concerned on the company’s aggressive cost cutting plans that could harm future growth.
Indicators and economic data over the quarter suggest that macroeconomic conditions in Brazil remain sluggish. The depreciation of the BRL against foreign currencies (it has fallen -14.3% and -17.1% against the SGD and USD respectively) contributed to inflationary pressures. In February, consumer prices in Brazil (represented by the IPCA inflation data) climbed 7.7% year-on-year, up from a 7.1% year-on-year increase in January and increasing the most since May 2005.
Policy-makers have continued their monetary tightening cycle, hiking the benchmark Selic rate by 50 basis points in early March up to 12.75% - a level last seen in February 2009. Consumer confidence continued declining as Brazilians policy-makers’ attempt implementing fiscal austerity (reducing budget deficit) to avoid a downgrade to the country’s sovereign credit rating. A combination of monetary and fiscal tightening has been reflected on the economy’s outlook – consensus GDP forecasts predict Brazil’s economy to shrink -0.65% this year. However, earning estimates for Brazilian corporates, earnings remained somewhat stable over March (excluding 2015’s estimated earnings). 2015’s estimated earnings were revised -3.75% lower month-to-date, whereas 2016’s and 2017’s were revised by -0.26% lower and 0.08% higher month-to-date (earnings are -9.47%, -5.61% and -2.61% lower year-to-date for 2015, 2016 and 2017 respectively). The revisions were primarily in the Utilities, Industrials and Materials sectors.
As of 31 March 2015, the Bovespa index traded at estimated PE ratios of 12.2X, 9.9X and 8.2X for 2015, 2016 and 2017 respectively, while its fair PE ratio is 11.5X. The pace of earnings downgrades has somewhat followed the losses incurred in Brazilian equities (from a SGD perspective) over 1Q 15. Thereforewe retain the rating of 4.0 stars – “Very Attractive” for the Brazilian equity market. Investors should note that Brazil’s economic conditions may remain weak for some time as the country’s policy-makers are tightening fiscal and monetary policies. So investors should remain patient and focus on the long-term horizon.
US and European equities have continued to trek higher in 1Q 2015, particularly European equities which have been bolstered by positive sentiment following the expansion of the European Central Bank’s asset purchase program. While equity prices for both markets have continued to trek higher, earnings estimates have not followed suit; earnings estimates have remained stagnant for European equities while US equities have actually seen downgrades to earnings estimates. The result has been further increases in the valuations for both markets, which at this juncture, has seen us turn wary towards both markets, particularly following their strong performance over the past 2-3 years. We will be keeping a close watch on the valuations for both markets, with potential downgrades to both markets a possibility.
A continued disparity in valuations dictates that a more positive view on the Emerging Markets versus the developed markets is still warranted, and we are maintaining a 5.0 star rating on both Asia ex-Japan and the Emerging Markets (where we expect the market to deliver strong returns over the next three years), while keeping our 2.5 “neutral” rating on the US and Europe for now, on the very modest levels of upside we forecast from these developed markets
The Research Team is part of iFAST Financial Pte Ltd
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